Everyone should have an emergency fund. However, 64% of Americans today live paycheque to paycheque.
Not only that, 56% of Americans can’t cover $1000 of emergency. The figure is similar if not worst in other countries.
There are many good reasons to have an emergency fund but sadly, most people don’t have one. Today we’re going to cover why that may put you in danger and how you can start making a change today.
An emergency fund should cover 3–6 months of your living expense but you can save up to 8–12 months if you want more security. You can use that 3–6 months of emergency money to obtain another job if you lose your current job.
Table of Contents
What is an emergency fund?
An emergency fund is money that you can tap into should something unexpected happens.
For instance, when someone in your family is sick and your insurance doesn’t cover it, you’ll have to pay out of pocket. Should you not have money to pay for it, you may have to borrow money quickly from a bank or from pay-day loan companies.
Why should you have an emergency fund?
Having an emergency fund can prevent you from going into debt (or more debts) if an emergency occurs.
Here are some scenarios where you may need an emergency fund:
- In case you lose your job
- In case you want to quit your job right away
- In case they find mold in your residence (or if your house flooded or caught on fire) and you’re forced to find another place for the time being
- To pay for you or your family’s sudden illness
- To fix your leaky roof
- To fix your car engine
- To bail someone out of jail
- To send money to your loved ones because they are in dire need of money
- In case inflation strikes more than you expected at least you can still afford things
Some of the above scenarios are more likely than others but the idea is the same.
You should have an emergency fund because life is full of surprises. You never know when you may need to spend more than planned that month.
How much should you save for an emergency fund?
The rule of thumb is that you should save up 3–6 months’ worth of expenses for your emergency fund.
If your monthly expense is $4000, you need to save up $12,000 — $24,000 in total.
In Toronto, the average monthly expense for a single person is $3341 so a person living in Toronto would have to save up $10023 — $20046 in total.
To figure out your monthly expenses, you should look at your transaction history.
You can adjust the timeframe to only show you the last month’s cost. If you pay everything via your card, you’ll be able to tell exactly how much your expense was.
Add up any costs that aren’t on your card if you don’t use your card to pay for everything.
It shouldn’t be hard to figure out how much your monthly cost is at all. You can start paying everything using one card (unless you got a business expense) to easily define your monthly expense.
Furthermore, some people even recommend saving up 8–12 months’ worth of an emergency fund.
Think about it like this, if you lose your job today, how long can you survive before you find another job?
If you got a side hustle or another stream of income, you may not need to worry as much about saving up 8–12 months’ worth of emergency funds but if you don’t have any other stream of income, you have to make sure that you can indeed find another job within 3–6 months.
How many months of an emergency fund you should save depends on your particular circumstance but you should definitely aim for more than 3 months’ worth of an emergency fund.
How do you save an emergency fund?
Before you think about redoing your kitchen, taking that vacation, or tossing money into crypto, you need to save up on emergency funds first, and here’s how you’ll going to do it.
You can read this article right here to learn how you can live more frugally and save more money.
- Move to a cheaper place
There are some costs that can’t be cut down such as rent. You pay a certain amount of rent each month, that amount is non-negotiable.
You can either move to someplace cheaper or you continue to live at the same place and pay the same amount of rent.
If you own your house and are paying the mortgage, unless you refinance, you’d be paying the same amount to the bank each month.
In which case, you can rent out a spare bedroom on Airbnb or find a tenant to move in. These options can save you more money.
- Cook instead of ordering takeout or eating out
You can save a lot of money cooking your meals yourself rather than ordering takeout or eating out.
It’ll also be cheaper in most cases.
Cooking is not hard. There are tons of videos on YouTube that teach you how to cook.
Cooking is literally as easy as cutting the ingredients into bite-sized pieces, putting them into the water, boiling them, seasoning them, and you’re good to go.
Of course, there are other ways to cook but I’m pointing out how easy cooking can be.
It can surely save you a lot of money.
- Consider ditching your car
Car is one of the largest expenses for most people. If you live in the city, there may not be any need for cars at all.
33% of people in my city don’t drive because everything is within 40 minutes of transit away.
If you got a good transit system where you live, you may not need to own a car at all.
It costs about $1000/month to own and maintain a car.
You can rent your car out on Turo instead of selling it if you’re not ready to part ways with it but know that you’ll definitely be saving quite a bit of money by not driving.
- Create another stream of income
If you got another stream of income, you may be able to save more money faster.
There are so many ways to create another stream of income online. As long as you got access to the internet, you can be rich. Being rich is easier than most people think. It’s not as unattainable as you may believe.
Check out the ‘Make Money’ section on HelloMoneyTree for some ideas of what your next income streams should be.
I highly recommend blogging because it’s the business with the lowest capital cost and the highest rate of potential return. Plus you get to work anywhere in the world anytime you want since everything is done over the internet.
Click here for a comprehensive blogging guide. It has everything you need to get started.
The blogging section on HelloMoneyTree also takes you through everything you may need to know about how to make money blogging in depth.
Where should you keep your emergency fund?
Here are some places where you can keep your emergency fund. Keep in mind, I’m not a financial advisor. I’m just pointing out some potential places to store your emergency fund.
- Savings account
A savings account is the most obvious place to keep your emergency fund. The interest rates in savings accounts are notoriously low so you won’t be making much money at all if you keep your money in there but it is reimbursable by the government for up to a million dollars in events of bank failure.
- GIC (Guaranteed Investment Certificate)
GIC is pretty secure and a pretty safe place to store your money. However, there’ll be a minimum amount of commitment time you must follow.
This may be 5 years for instance. So you’ll have to keep your money in GIC for a minimum of 5 years.
You should consider cashable GIC since they have high rates and have more flexibility should you carry out early withdraws.
Why don’t more people save money?
To most people, saving money is at the very back of their minds. People battle all kinds of things every day from work stress to health issues.
Saving money may not be the first thing they think about when they get home from a long day of work. They may just order takeout because they are too tired to cook.
Below are some more reasons why most people don’t save enough money to cover emergencies.
- They don’t realize they need an emergency fund
- They don’t have money left over to save after paying for necessities
- They spend money recklessly to impress people online and offline
- They invest it all thinking their investment is a guranteeed win and they should put everything in
- They are unable to delay pleasure so they use the money to have fun first then realize they don’t have enough left to save
- They already used up their rainy day money and aren’t in a place to save more
Some of the listed reasons are heartbreaking and I pray for those who are suffering at the hands of poverty. I wish you the best of luck.
However, I will say one thing, you can change your circumstances as long as you got internet and some time after work.
You need to dedicate at least one hour each day to work on a side hustle. This can’t be any side hustle. If you need to trade your time for it, you’d essentially be locking yourself into another active ‘job’.
What you want is passive income. Click here to learn the 36 passive incomes you can try today.
With passive income, you’re not trading your time for money. You are creating the work upfront and let your work continue to bring in money for you.
Blogging, for instance, is passive income. I create the articles now and let them rank on Google. With time, it brings in traffic and all I have to do is to keep updating my best-performing articles and publishing content once in a while (once per week for instance) to keep my blogging traffic.
You can monetize your blog in a number of ways including ads, sponsored posts, courses, etc.
Many successful bloggers are able to work 5 hours a week and bring in a full-time income every year. Some bloggers are even able to bring in millions per year through their blogs.
Click here for the beginner’s blogging guide. It has everything you need to know to get started.
There are also other ways to create other streams of income. I recommend you to check out HelloMoneyTree’s “Make Money” articles for more inspiration.
Final thought
In summary, you need 3–6 months’ worth of emergency fund. If you want to be more secure, you can aim for 8–12 months’ worth of emergency money.
Having an emergency fund at hand can save you from debts and may even save your dignity as well. a
Nobody wants to live in the street because they got into an accident, can’t work, and has no money to make their mortgage payment.
It’s also good to keep a good relationship with your family and friends so they may be a last resort if you need it.
